The International Monetary Fund (IMF) has recommended that El Salvador stop using Bitcoin as its legal tender. This is as a result of the effect it would have on the financial stability and consumer protection of the country.
Since September, the North American country has been using cryptocurrency as a legal tender for payments and exchanges. The latest resolution from the IMF’s executive board on their recent meeting to the country.
The international body says that there are “large risks associated with the use of Bitcoin on financial stability, financial integrity, and consumer protection, as well as the associated fiscal contingent liabilities.” According to Bloomberg, the country’s use of Bitcoin as a legal tender could affect loan issuance from the IMF. The regulatory body “also expressed concern over the risks associated with issuing Bitcoin-backed bonds,” to El Salvador.
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Interestingly, El Salvador’s president Nayib Bukele has been a hard supporter of cryptocurrency. He actively pushed the country to adopt Bitcoin as a legal tender.
El Salvador is currently the first and only country in the world to adopt Bitcoin as a legal tender. This law makes the bitcoin alongside the dollar the country’s legal tender for transactions.
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President Bukele announced the historic moment via a tweet. The move to make Bitcoin a legal tender had been in the works for months. El Salvador eventually passed the legislation in June 2021.
Adopting cryptocurrency as a legal tender heralds technological sophistication, whereas the country’s populace is not tech-savvy. CNN reported that research by the CEO of Strike, a digital finance company, says that about 70% of the El Salvador “active population” don’t have access to a bank account.
What the country needs are active bank accounts, fewer cash-only transactions and more financial inclusion. Cryptocurrency is notoriously volatile, and this could hurt the country’s economy in case of a swing. The bitcoin price rose historically to over $60,000 in April and later crashed to less than half of its peak value shortly afterwards.
Experts believe that the only meaningful application of the adoption might just be remittances. Philip Gradwell, Chief Economist at blockchain data platform Chainalysis says “Bitcoin isn’t really designed to be a means of exchange so this is an early experiment for the currency” Time will tell how the adoption of bitcoin in El Salvador will affect its economy and its people. This might actually affect how the IMF issues out loans to the developing country onwards.
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